Malaysia: Demand from China to support domestic trade

• Apr 20, 2023

PETALING JAYA: Malaysia can expect to benefit, to a certain extent, from China’s economic growth this year following the cessation of its zero-Covid policy, as the latter registered a stronger-than-projected gross domestic product (GDP) growth of 4.5% year-on-year (y-o-y) in the first quarter of 2023 (1Q23), say analysts.

However, they also cautioned that the growth of the country’s largest trading partner could be a double-edged sword.

China has been Malaysia’s biggest trading partner since 2009 and the value of trade between the two countries accounted for about 17% of Malaysia’s total global trade, worth RM2.8 trillion in 2022.

China’s 1Q23 GDP expansion beat market expectations of 4% growth as the end of lockdowns and reopening of its economy early this year had led to a robust pick-up in consumer spending, resulting in faster growth in tertiary sector which posted a 5.4% y-o-y expansion, against the 2.3% recorded for the last three months of 2022 (4Q22).

Latest monthly data also showed that Chinese retail sales growth strengthened further to 10.6% y-o-y in March against the combined rate of 3.5% for the first two months of 2023, exceeding market forecast of 7.4% y-o-y.

Industrial production also went on an uptrend, posting a growth rate of 3.9% y-o-y in March compared with the combined 2.4% in January and February.

China’s job market had improved following the stronger economic activities, with unemployment rate declining to 5.3% in March against the 5.6% of the preceding two months, lower than the Chinese government’s annual target of 5.5%.

MIDF Research said regional economies could ride on from China’s economic reopening despite the impact having yet to be felt in Japan, South Korea, and Taiwan which continued to report declining exports.

The research house said the same scenario could be expected for Malaysia as exports to China recorded a contraction of 9.1% y-o-y for the first two months of 2023 after a 12.1% slide in December.

The silver lining however, can be seen from the slower decline in exports, with the research house saying: “Despite limited spillover effects, we still foresee recovering demand from China to support Malaysia’s trade outlook this year. We anticipate China’s growth to continue improving in the coming quarters, supported by sustained growth in domestic spending as well as recovery in the property sector backed by policy support.”

Singapore-based economists at Coface Services South Asia-Pacific Pte Ltd, Bernard Aw and Eve Barre said China’s 1Q23 GDP performance surpassed their forecast of 4.2% and Malaysia’s tourism and travel-related industries should be able to take advantage of the Chinese slipstream.

Aw and Barre added China was the third source of international travellers to Malaysia before the 2020 lockdowns, representing 11% of inbound arrivals in 2019.

On the flipside however, they observed that China’s industrial output growth was marginally subdued at 2.9% y-o-y in 1Q23, compared with 6.2% in the corresponding quarter of last year.

“Falling output of microcomputers and semiconductors were the main drags on muted Chinese industrial production, reflecting ongoing adjustment of electronics inventory amid weakening global demand,” they said.

Offering an alternative view, Centre for Market Education chief executive Carmelo Ferlito said China’s Caixin Manufacturing PMI or Purchasing Manager’s Index unexpectedly fell to 50 in March from February’s eight-month peak of 51.6, missing market forecasts of 51.7.

According to Trading Economics, the latest result highlighted growing doubts about the strength of China’s recovery momentum, amid ongoing property downturn and global financial uncertainty. Both output and new orders rose at softer pace while foreign sales and employment fell.

Ferlito said the consumer spending-fuelled recovery in China may be dangerous and unsustainable, while pointing out the high likelihood of it having been influenced by Chinese New Year festivities as well.

He told StarBiz: “The apparent improvement is the natural rebound after three years of disastrous lockdown policies, with its people likely experiencing consumption hysteria after having been incarcerated at home for a long period.”

Looking at the consumer confidence index for March, where China posted a score of 94.7, Ferlito said while confidence is also rebuilding, it is still a far cry from the pre-lockdown levels of 2019 where confidence exceeded the 120 point mark.

“Looking at the latest available trade data, China accounted for 13.3% of our exports in January this year, a decline of 11.9%. On the other hand, Malaysia has sourced 23.3% of its imports from China,” he said.

It is noteworthy, moving forward, that China could be playing a growing role as a source of imports for Malaysia rather than as an export destination.

Reinforcing Ferlito’s point, Coface’s Aw and Barre said Chinese imports of Malaysian goods decelerated by 11.2% y-o-y in the whole of 1Q23, compared with an increase of 12% y-o-y for the same period of 2022.

“After a marked slowdown of Malaysia’s electronics and electrical exports from 17.3% y-o-y in 4Q22 to 3.3% in 1Q23, we expect a further deceleration in the coming months. We continue to see weak external demand for Chinese’s industrial goods, which will weigh on trade within Asia region, including Malaysia,” they said.

While China’s economic recovery is good news to Malaysia in some aspects, it nevertheless faces downside risks to growth namely due to a more marked slowdown in global demand and a larger than expected monetary policy tightening by the major central banks.

“Therefore we remain prudent and project Malaysia’s GDP growth at 4.3% in 2023, while we expect China’s economy to expand by 4.4%,” said Aw and Barre.

Source: https://www.thestar.com.my/business/business-news/2023/04/20/demand-from-china-to-support-domestic-trade